REIT & InvIT Taxation India: Distributions & Gains, AY 2026-27

How are REIT and InvIT distributions taxed in India? REITs and InvITs are business trusts with pass-through status under Section 115UA. Their distributions are split into interest (taxed at slab rate), dividend (taxed or exempt depending on the SPV's tax regime), and rental income (exempt). Capital gains on sale of units are 20% STCG or 12.5% LTCG for AY 2026-27.

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) have become serious investment vehicles in India. Embassy Office Parks, Mindspace Business Parks, Brookfield India, and Nexus Select Trust on the REIT side, along with IndiGrid, IRB InvIT, and PowerGrid InvIT on the infrastructure side, collectively manage tens of thousands of crores in assets and distribute regular income to lakhs of unitholders.

The taxation is more complex than stocks or mutual funds because every distribution carries multiple components, each taxed under a different rule. Most investors lump the entire distribution as "dividend" and compute tax incorrectly. This guide breaks down each component, the applicable TDS, capital gains on unit sale, and how to report REIT/InvIT income correctly in your ITR for AY 2026-27.

Looking for expert help with REIT InvIT taxation India AY 2026-27 Section 115UA distributions capital gains? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant end-to-end: filings, notices, and advisory, all in one place.

What Are Business Trusts Under the Income Tax Act

REITs and InvITs are classified as "business trusts" under Section 2(13A) of the Income Tax Act, 1961 (Section 2(10) of the Income Tax Act, 2025). A business trust is a trust registered with SEBI as a REIT under the SEBI (Real Estate Investment Trusts) Regulations, 2014, or as an InvIT under the SEBI (Infrastructure Investment Trusts) Regulations, 2014.

The defining tax feature of a business trust is pass-through status under Section 115UA. The trust itself does not pay income tax on most categories of income. Instead, income passes through to the unitholders and is taxed in their hands. This avoids the double taxation that would occur if a company earned rental income (taxed at corporate rate) and then distributed it as dividend (taxed again in the shareholder's hands).

The Structure

A typical REIT or InvIT holds assets through Special Purpose Vehicles (SPVs), which are usually private limited companies. The trust owns majority equity in the SPVs. The SPVs earn income (rent from tenants, toll revenue, power transmission charges) and distribute it to the trust, which in turn distributes it to unitholders.

The tax treatment depends on which "pipe" the money flows through: interest paid by SPV to trust, dividend paid by SPV to trust, or rental income earned directly by the trust.

How Each Distribution Component Is Taxed

Every REIT/InvIT distribution statement breaks the payout into components. The tax treatment for resident individual unitholders for AY 2026-27 is:

Interest Income

When the SPV borrows from the trust (a common structuring technique), the interest the SPV pays is passed through to unitholders. This interest is taxable in your hands at your applicable slab rate, reported under "Income from other sources" in Schedule OS of the ITR.

For most listed REITs, interest is the largest component of the distribution — often 50-70% of the total payout. This is because the trust-SPV loan structure is tax-efficient: the SPV deducts the interest as a business expense, reducing its corporate tax, while the trust passes it through without paying tax at the trust level.

Dividend Income

Dividend from the SPV to the trust has a two-fork treatment:

Fork 1: SPV opted for Section 115BAA (concessional corporate tax at 22%). If the SPV has opted for the concessional 22% corporate tax rate under Section 115BAA, the dividend it pays is not eligible for the pass-through exemption. The unitholder must pay tax on this dividend at slab rates.

Fork 2: SPV did NOT opt for Section 115BAA. If the SPV pays tax at the regular corporate rate (25% or 30% depending on turnover), the dividend enjoys pass-through treatment and is exempt in the unitholder's hands.

In practice, most large REIT/InvIT SPVs have opted for Section 115BAA because the lower tax rate benefits the overall structure. This means most dividend components in your distribution statement will be taxable. Check each SPV's status in the REIT's distribution statement or annual report.

Rental Income

Rental income earned directly by the trust (not through an SPV) is distributed to unitholders and is exempt from tax in their hands for AY 2026-27. The trust itself is not taxed on this rental income because of pass-through status.

This makes the rental component of REIT distributions one of the most tax-efficient income streams available to individual investors in India. However, note that TDS at 10% is still deducted on this component under Section 194LBA. You can claim credit for this TDS against your total tax liability and get a refund if the rental income is exempt.

Repayment of Debt (Return of Capital)

When the SPV repays loan principal to the trust, and the trust distributes this amount, it is treated as a return of capital, not as income. It is not taxed as income in the year of receipt. Instead, it reduces the cost of acquisition of your units.

When you eventually sell the units, your capital gains will be calculated using the reduced cost. In effect, tax on return of capital is deferred to the point of sale, not eliminated.

Example:

• You bought 100 units at Rs 300 each. Cost of acquisition: Rs 30,000.
• Over three years, you received Rs 5,000 in return-of-capital distributions.
• Adjusted cost of acquisition: Rs 30,000 − Rs 5,000 = Rs 25,000.
• If you sell at Rs 350 per unit (Rs 35,000), your capital gain is Rs 35,000 − Rs 25,000 = Rs 10,000, not Rs 35,000 − Rs 30,000 = Rs 5,000.

TDS on Distributions: Section 194LBA

Section 194LBA requires the business trust to deduct TDS on distributions to unitholders. The rates and rules:

For Resident Unitholders

• Interest component: TDS at 10%
• Dividend component (taxable): TDS at 10%
• Rental income component: TDS at 10%
• Return of capital component: No TDS
• Threshold: No minimum threshold. TDS applies on every rupee distributed, unlike regular company dividends where TDS kicks in only above Rs 5,000.

For Non-Resident Unitholders

• Interest component: TDS at 5% (subject to lower DTAA rate with proper documentation — Form 10F and Tax Residency Certificate)
• Dividend component: TDS at 10% (or DTAA rate, whichever is lower)
• Rental income component: TDS at applicable rates

Claiming TDS Credit

The TDS deducted on distributions appears in your Form 26AS and Annual Information Statement (AIS). When filing your ITR, claim credit for this TDS under the "TDS" schedule. If the rental income component is exempt and TDS was still deducted on it, you will get a refund of that portion. For a guide on reconciling TDS credit, see our Form 26AS and AIS guide.

Capital Gains on Sale of REIT/InvIT Units

When you sell your REIT or InvIT units on the stock exchange, the gain is taxed as capital gains. The holding period threshold is 12 months for listed units (same as listed equity shares).

For AY 2026-27 (FY 2025-26)

Important for AY 2026-27: The Rs 1.25 lakh annual LTCG exemption under Section 112A does not apply to REIT and InvIT units for FY 2025-26. LTCG on these units is taxed at 12.5% under Section 112 without any exemption threshold. This means even if your LTCG is Rs 50,000, you pay 12.5% tax on the full amount.

From FY 2026-27 (AY 2027-28)

The Finance Act 2025 amends Section 115UA(2) to expressly refer to Section 112A. From FY 2026-27, LTCG on listed REIT/InvIT units will be taxed at 12.5% under Section 112A, and the Rs 1.25 lakh annual exemption will apply. This is a meaningful tax saving for investors with moderate gains.

Adjusted Cost of Acquisition

When computing capital gains on sale, remember to reduce your purchase price by any return-of-capital distributions received during the holding period. Use the adjusted cost, not the original purchase price.

If you inherited or received REIT units as a gift, the cost of acquisition is the previous owner's cost (with indexation available for long-term gains under Section 112, but not under Section 112A).

Securities Transaction Tax (STT)

STT is payable on the sale of listed REIT/InvIT units on a recognised stock exchange. STT at 0.025% is payable by the seller on the sale value (same rate as equity delivery). STT paid is not deductible as an expense when computing capital gains.

How to Report REIT/InvIT Income in Your ITR

Step 1: Choose the Correct ITR Form

If you have REIT or InvIT income (distributions or capital gains from sale), you must file ITR-2 (or ITR-3 if you have business income). ITR-1 (Sahaj) does not support business trust distributions or capital gains from listed securities. For selecting the right form, see our ITR form selection guide.

Step 2: Report Distribution Income

Interest and taxable dividend: Report in Schedule OS (Income from Other Sources). Enter the gross amount (before TDS) and the nature of income.

Exempt rental income: Report in the exempt income schedule. Even though it is exempt, disclosure is required.

Return of capital: Do not report as income. Instead, note the reduction in cost of acquisition for future capital gains computation. Maintain a separate tracker for adjusted cost.

Step 3: Report Capital Gains from Sale

If you sold REIT/InvIT units during FY 2025-26:

• Short-term gains: Report in Schedule CG under Section 111A. Enter the sale value, purchase cost, holding period, and computed gain. Tax at 20%.
• Long-term gains: Report in Schedule CG under Section 112. Enter the sale value, adjusted purchase cost (reduced by return-of-capital distributions), holding period, and computed gain. Tax at 12.5%.

Step 4: Claim TDS Credit

Match TDS deducted on distributions with entries in Form 26AS and AIS. Enter the TDS details in Schedule TDS of the ITR. Any excess TDS (particularly on exempt rental income) will result in a refund.

REIT vs InvIT: Tax Differences

While both are business trusts under Section 115UA, there are practical differences in how their distributions are structured:

For tax purposes, the Section 115UA framework applies identically to both. The difference is in the composition of the distribution, which affects your effective tax rate. A distribution that is 60% interest (slab rate) and 20% exempt rental is taxed differently from one that is 40% interest and 40% taxable dividend (also slab rate, but the underlying SPV structure matters for future changes).

Common Mistakes When Filing REIT/InvIT Income

Treating the entire distribution as dividend. The most common error. Investors report the full distribution amount under "dividend income" and either pay tax on the whole thing or claim it as exempt. Both are wrong. Break the distribution into its components using the REIT's distribution statement.

Using ITR-1 instead of ITR-2. ITR-1 does not have schedules for business trust income or capital gains from listed securities. Filing ITR-1 when you have REIT income will result in a defective return notice under Section 139(9).

Not adjusting cost for return-of-capital distributions. Return of capital reduces your cost of acquisition. If you sell units without adjusting cost, you understate your capital gains and will face scrutiny when the AIS data (which includes all distributions) does not match your ITR.

Ignoring TDS on exempt rental income. TDS is deducted on the rental component even though it is exempt. If you forget to claim this TDS credit, you lose the refund.

Applying the Rs 1.25 lakh LTCG exemption for FY 2025-26. Section 112A does not apply to REIT/InvIT units for FY 2025-26. The exemption applies only from FY 2026-27 after the Finance Act 2025 amendment. Applying it for AY 2026-27 will result in underreporting of tax.

Comparison with Other Investment Vehicles

REITs offer a middle ground: real estate exposure with stock-market liquidity, professional management, and a tax-efficient structure where the rental component is exempt. The main tax disadvantage for AY 2026-27 is the lack of the Section 112A exemption on LTCG, which equity mutual funds enjoy.

Listed REITs and InvITs in India (July 2026)

For reference, the currently listed REITs and InvITs on Indian stock exchanges:

REITs:

• Embassy Office Parks REIT (Embassy REIT)
• Mindspace Business Parks REIT
• Brookfield India Real Estate Trust
• Nexus Select Trust (retail-focused REIT)

InvITs:

• India Grid Trust (IndiGrid) — power transmission
• IRB InvIT Fund — highway toll
• PowerGrid Infrastructure Investment Trust — power transmission
• National Highways Infra Trust (NHIT) — highway toll
• Virescent Renewable Energy Trust — solar energy

Each has a different distribution composition. Check the quarterly distribution statement from each trust before filing your ITR.

---

This guide is based on Section 115UA and Section 194LBA of the Income Tax Act, 1961, the corresponding provisions of the Income Tax Act, 2025, the Finance Act 2025 amendment to Section 115UA(2), and SEBI regulations for REITs and InvITs. Capital gains rates reflect the amendments introduced by the Finance (No. 2) Act, 2024 (July 2024 budget). The Rs 1.25 lakh LTCG exemption under Section 112A does not apply to REIT/InvIT units for FY 2025-26 but is expected to apply from FY 2026-27 following the statutory amendment. For individual tax computation on REIT/InvIT income, consult a qualified tax professional or explore Tax Garden's ITR filing services.